Iran: a frontier for the future

Investors trawling for new frontier markets have of late been rolling into Iran. Charles Robertson at Renaissance Capital (which bills itself as a Frontier bank) visited recently and his verdict?

It’s like Turkey, but with 9% of the world’s oil reserves.

Most interestingly, Robertson found a bustling stock market with a $170 billion market cap — on par with Poland – which is the result of a raft of privatisations in recent years. A $150 million daily trading volume exceeds that of Nigeria, a well established frontier markets. And a free-float of $30 billion means that if Iranian shares are included in MSCI’s frontier index, they would have a share of 25 percent, he calculates.

What of the economy? Renaissance estimates its size at $437 billion, which if accurate would place it higher than Austria or Thailand. Foreign investors are keen — a thawing of relations with the West has triggered a race among multinations to explore business opportunities in the country of 78 million. Last month, more than 100 executives from France’s biggest firms visited Iran. Robertson writes:

Iran is beyond the final frontier for portfolio investors, but many on the ground appear to believe there is a good chance it will become investable (at least to frontier funds) within the next 6-18 months..Most interesting of all, there is a dynamic reform team now in charge of the government and central bank, which is undertaking the classic monetary and fiscal reforms EM investors usually like. This looks to us like a potential re-ratingplay that could – in an investable scenario – attract those investors who have recently invested in Saudi Arabia, like those who invested in Turkey after 2001 and Russia since the 1990s.

Not so fast. Despite last year’s initial agreement between Teheran and six world powers, sanctions on Iran remain and until these are removed, few investors will venture there. Second, fathoming Iran’s idiosyncratic markets could prove a challenge for foreigner, Robertson acknowledges, citing the banking sector and bond markets as an example:

Iran’s fixed income markets are unlike anything we’ve ever seen. Any corporate or government bond has a fixed coupon (around 20%) a fixed price, and as far as we understand, they can be redeemed for cash at any time. There appears to be no functioning interbank or money market interest rate and no repo rate. Indeed as far as we can see, there is no market pricing signal of any sort. Even the currency has been heavily restricted; trying to profit from FX moves can lead to jail.

Finally, corruption could prove a thorny issue – Transparency International scores Iran 25 out of 100 in its index, putting it on par with Nigeria and Ukraine. A Reuters investigation late last year revealed how a foundation controlled by Iran’s Supreme had accumulated assets worth billions of dollars through the systematic seizure and sale of thousands of properties belonging to ordinary Iranians.(www.reuters.com/investigates/iran/) There are likely to be many within the country who will have a vested interest in preserving Iran’s status quo.